Gates Joins a Dream Team Fund

February 27, 2005

By Steve Rosenbush The rise of the private-equity firm has been one of the great financial success stories of the last few years. After the stock market fell to earth in 2000, investors who had learned to take double-digit returns for granted had to go hunting for profits in unusual ways. Many turned to private equity, a financial term for stakes in privately held companies. By acquiring smaller, unlisted concerns in health care, auto parts, and other industries, private-equity players often generated returns of 30% or more in a few years' time.

In the private-equity world, few investors have been more influential, or successful, than Robert Bass. The billionaire oilman from Texas practically invented the industry, creating Oak Hill Capital Partners as a vehicle for himself and a small group of associates. Many of the people who worked for him -- including billionaire investors Richard Rainwater and David Bonderman, the founder of private-equity firm Texas Pacific -- went on to create powerful empires of their own.

"VERY SMART GUYS." Now, Bass is launching what could be his highest-profile fund. Microsoft (MSFT) founder and Chairman Bill Gates and Phil Knight, Nike (NKE) founder and chairman, have taken sizable stakes in Oak Hill Capital II. Out of their own money, Gates has ponied up $70 million for the fund, Bass has contributed $250 million, and Knight has kicked in $200 million, according to Kevin Max, a spokesman for the Oregon Treasury Dept., and Michael Larson of investment company BGI, which manages the Gates fortune.

The Oregon Investment Council, part of the state's Treasury Dept., has invested $150 million. "They're very smart guys at Oak Hill," says Larson.

As the tech sector matures, even investors like Gates are putting at least some of their money in small but successful companies focused on rather mundane businesses. Bass invests in a broad range of companies, many in need of turnaround. One of his most recent moves was the acquisition last year of drugstore chain Duane Reade.

LIMITED ALTERNATIVES. The new Oak Hill fund will focus on a similarly wide variety of industries. It's targeting business and financial services, consumer products, retail, distribution, health care, telecom, tech, and basic industries, according to Max, who heard a presentation by J. Taylor Crandall, the second-in-command at Oak Hill.

The fund is aiming for a return of 25% a year or more. So far, it has raised about $1.5 billion and plans to drum up $1 billion more. A spokesman for Crandall and Oak Hill declined comment.

The star power lined up behind Oak Hill II reflects the central role that private equity plays in today's financial world. It's appealing now because current alternatives are somewhat limited. Double-digit returns in the stock market can't be counted upon. Investing in IPOs isn't what it used to be. Even venture capital -- really a form of private equity aimed at startups -- is limited. Companies aren't being launched at the same pace they were seven or eight years ago.

AMBITIOUS TARGET. High-profile clients like Gates and Knight ratify the private-equity approach. Gates has invested $55 million in Oak Hill funds in the past. Oak Hill manages lots of money for Knight, who in January announced that he planned to sell up to 5.7 million shares of Nike, or 8% of his stake. A Nike spokesman wasn't immediately available for comment.

To maintain that confidence, Bass will have to make good on his plans to generate a 25% return. But given his track record, there's no reason right now to doubt he will. Rosenbush is a senior writer at BusinessWeek Online